A common reason for failed debt collection is that the managing director of the debtor company, through years of legal proceedings, takes the company’s assets and then puts the company into bankruptcy. How does the Hungarian bankruptcy law and the provisions of the civil procedure code support creditors who are generally “in the dark”? This article answers this question by examining a recent judgment of a Hungarian Court of Appeal.
Liability of the manager for the debts of the company
Under Hungarian corporate law, corporations are independent legal entities, which are generally liable for their debts with their own assets, while, in general, partners and managers are not liable to pay the debts of the corporation. in debt.(1) In the context of debt collection, the liability of the managing director may be engaged if the debt cannot be recovered from the company. Recovery may be considered impossible if the company is dissolved without a rightful claimant. Indeed, during the operation of the company, the payment of the debt can be demanded from the company. There is therefore a theoretical possibility of payment. The responsibility of the management for the unpaid debts of the company can therefore only be established upon the dissolution of the debtor company.
Failure to collect the debt may engage the liability of the director of the debtor company for professional misconduct.(2) Indeed, this type of liability is especially linked to the withdrawal of assets from the insolvent company and other harmful behavior. to the interests of creditors, which ultimately results in the non-recovery of the debt.
Hungarian bankruptcy law(3) provides that if the dissolution of the legal person without succession is pronounced in the context of liquidation proceedings, the creditors cannot seek the determination of the liability of the managing director and claim pecuniary compensation only in the context of a specific procedure specified in the Bankruptcy Act.(4)
Procedures relating to the liability of the director for fault
In accordance with the law on bankruptcy, the liability of the managers of the liquidated debtor may be engaged if they have not exercised their management functions in the interest of the creditors during the three years preceding the opening of the liquidation procedure. as a result of any situation involving a potential danger of insolvency, as a direct consequence of which the assets of the economic operator have diminished, or giving full satisfaction to the claims of creditors, may be hindered for other reasons.(5 )
To engage the responsibility of the administrator, the creditor must initiate and follow a legal procedure in two stages. First, upon liquidation, a declaratory action must be brought to establish the liability of the director. Second, if the declaratory action is successful and the claim could not be recovered in the liquidation proceedings, after the close of the liquidation, a second action is brought against the director.(6)
The practical difficulty of the above procedures is that the creditor must declare and prove the facts, while the information and documents are generally only accessible to the debtor company and not to the creditor.
This issue arose in a recent court case judged at second instance by the Szeged Court of Appeal.(seven)
In the present case, the creditor requested the questioning of the managing director of a debtor company, alleging that the latter had not complied with its essential obligations.
First, during the director’s tenure, the director failed to publish the company’s annual reports, which under tax law must be done every calendar year by May 31.
In addition, after the declaration of insolvency of the debtor, the director failed to comply with the obligation to hand over the corporate documents and assets of the debtor to the liquidator and to provide information.
Due to the above omissions, the applicant had no information about the company’s finances.
Reversal of the burden of proof under bankruptcy law
The Bankruptcy Act itself is intended to facilitate proof by the creditor when an administrator has omitted:
- fulfill or fail to fulfill, for reasons for which they are responsible, the obligation prior to the opening of the liquidation procedure to file and publish the annual accounts of the economic operator;
- comply with the obligations to draw up reports and accounts and have the liquidator hand over the documents and values relating thereto; and
- provide information that no situation involving a potential danger of insolvency has arisen during their tenure as directors, or if such a situation has indeed arisen, they have exercised their managerial duties with due regard the interests of the creditors which are incumbent on this administrator.(8)
The bankruptcy law therefore provides a rule of reversal of the burden of proof when the manager has prevented the creditors from knowing the financial situation of the company and from proving the abuses of the management.
In the aforementioned case, the Court clarified that in the event of a breach by the director of the aforementioned obligations, it was sufficient for the creditor to allege, rather than prove, the two following elements of fact relating to the director’s liability:
- the existence of a situation carrying a potential danger of insolvency (without identification of a precise date) during the defendant’s term of office as director; and
- behavior prejudicial to the interests of creditors (without identifying the specific prejudicial behaviour).
The burden of proof being reversed, the administrator had to prove that no situation involving a potential risk of insolvency had occurred during his term of office as administrator or, if such a situation had actually occurred, that he exercised his managerial functions with due regard to the interests of creditors.(9)
Reversal of the burden of proof based on the Code of Civil Procedure
In addition, creditors can generally avail themselves of the legal concept of “probationary difficulty” introduced by the new Code of Civil Procedure in 2018(10). The new instrument aims to deal with situations where the party with the burden of proof does not have access to the evidence, but the other party is likely to have it (for example, internal documents of the debtor company and bank account statements).
However, if the party relying on the “evidentiary predicament” presumptively proves that the proof of the factual allegations is beyond its means, the opposing party can be expected to refute the facts. alleged. The court considers the alleged fact to be true and the opposing party must rebut the presumption.(11)
The Court assessed the applicability of the notion of “probationary problem” in the context of the proceedings in question. The Court considered the reverse onus rule in bankruptcy law to be a “special type” of evidentiary difficulty and clarified that evidentiary difficulty could be established if the director had failed to deliver the documents of the debtor company to the liquidator and thus prevented the creditors from proving the abuses of the management.(12)
The importance of the above conclusions is that the difficulty of proof can be applied more broadly, so that the burden of proof can be reversed, not only with respect to the facts set out in the bankruptcy law, but in principle with regard to any aspect that the creditor cannot prove for lack of information.
Based on this decision, it is likely that the institution of evidentiary difficulties will become an effective tool in the hands of creditors in the future.
If the managing director of the liquidated company has acted illegally in a situation of quasi-bankruptcy, the creditors can claim from the managing director the reimbursement of their unpaid debts within the framework of a special procedure. The lack of information on the internal affairs of the debtor company is a major difficulty for creditors, which makes it difficult to prove their claims.
Several rules are already in place to facilitate proof by creditors. If the director has failed to publish the annual accounts of the company or to comply with the obligation to hand over the documents and the assets of the company to the liquidator, the burden of proof is reversed and he must prove that he does not has committed no breach against creditors.
In addition, the recent court decision clarifies that in case of the above omissions by the director, creditors can avail themselves of the new instrument, introduced by the Code of Civil Procedure: the so-called “problem probation”. On this basis, creditors may be able to reverse the burden of proof against any fact that they cannot prove because the director obstructed access to information.
Based on the recent decision, it is hoped that creditors will be able to more effectively enforce their claims against the managing directors of insolvent debtor companies.
For more information on this subject, please contact Richard Schmidt Where Pierre Gritta to SMARTLEGAL Schmidt & Partners by phone (+36 1 490 09 49) or email ([email protected] Where [email protected]). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.